Full Transcript of Yahoo's 3Q05 Conference Call -- Q&A (YHOO)

Here’s the entire text of the Q&A from Yahoo's (ticker: YHOO) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator:

Thank you. We will now begin the question and answer session. If you have a question press * then 1 on your touch-tone phone. If you wish to be removed from the queue please press the pound sign or the hash key. To ensure that all participants are able to ask questions, please limit yourself to one question. Once you have asked your question you will be immediately placed back into conference. If you are using the speakerphone you may need to pick up the hand set before pressing the numbers. Once again, if is there any questions, please press * then #1 on your touch tone phone. The first question comes from Imran Kahn from J.P. Morgan.

Q: Yes hi, guys couple of questions. Terry you talked about improving moneterization. I was wondering if you could talk about you are doing in terms of gaining market share or in the base search market in the international market it seems like international is driving tremendous growth and your competitors have dominant market share there and secondly, you recently signed a couple of network partnership with like for example with iVillage, I was wondering if you could what drove the success I think it was a competitive win against Google to win those, were you more aggressive on the revenue sharing part or the technology win, could you comment on that? Thank you.

A: This is Dan, again market share globally, we have been in the search business for two years, we are actually extremely pleased the overall market has been growing very rapidly we've been growing right along with it particularly in the United States. In Europe, we continue to pick up share in some of the larger countries and we continue to improve the product and improve the algorithm distribute it better distributed tool bars, there are a whole lot of things that we have in place that have actually been helping us very effectively and of course in Asia and certain key countries with our relationship with Alibaba in China in Taiwan, in Hong Kong and other places that we have tremendous market share already and continue to do all the necessary things in terms of improving the product, rolling out new product, getting better distributions. So, we have done a lot in that space.

Operator:

The next question comes from Anthony Noto from Goldman Sachs. Please go ahead.

Q: Thank you very much. I was wondering you could comment on what strategic interest Yahoo may or may not have in portions of AOL. Sue, a question for you, it looks like the business has pretty strong momentum going into the fourth quarter if I look at the quarter over quarter growth rate in unique it is 8% and daily pages at 9% and that's faster than the rate of growth that you had in revenue it looks like you're building a lot of user activity that hasn't been moneterized yet as it relates to both branded and search could you comment on that and then in the fee business, similarly at a 13% sequential growth only 1% growth in revenue per unique user so it seems like there's some momentum in the fourth quarter from that unit growth and if you could give us a perspective and then last Terry, you had mentioned moneterization, could you specifically comment on what near term means it relates to increasing the fixed rate or coverage of sponsored leads on search on Yahoo.com? Thanks.

A : So Anthony I hope we've got all this, I’ll be easy, I’ll start off on the AOL strategic interest I always say this here we go you and I on this call alone right. Is that 300 odd more people on the call and now listening I assume that to be the case. So Anthony I'm going to pass that question because we never discuss any of those items. So I will go on to Sue who will start to answer the next question.

A: So Anthony, on the unique and daily page views growth in Q3 versus revenue and the Q4 momentum, I think it's worth just reminding everybody that the seasonality of unique users and page views tends to be often the exact compliment or the opposite of revenue. So, Q3 typically is a really strong quarter in users and usage and is typically a little bit softer quarter from a brand advertising perspective. So we have a little bit of unique relationship when you look at things sequentially it's a little hard to make a judgment, but I would say that year-over-year we saw very strong gains in users and in page views more North of 20% and that although very strong was still less than our overall revenue growth. We are seeing enhanced moneterization on both of the sides of our business. On the brand side a good proxy for the CPM side business look at marketing services revenue per page view and exclude search revenue from both then numerator and pages from the denominator. Just to give you some flavor in the US we saw that metric grow again in the double digits year over year, which is relatively consistent with what we've seen in the last few quarters. On the sponsored search side we think the key is really to focus on the fundamentals of the industry in terms of how many advertisers we have and how much revenue each of those advertisers are generating because how they allocate that is the functions of the tools they get and whether it is more inventory or revenue per search, but getting into the specifics on queries our worldwide trends on Yahoo sites and our affiliates again experiencing very healthy query gains up very strong double digits. On the RPS side although the country and product mix changes make it difficult to review the trends in aggregate, if you look at our own network in the U.S. to hold the variables constant which is how we quote it every quarter we think those are fairly representative of what we're seeing on an apples to apples basis and Q3 RPS in the US grew nicely again year over year as did last quarter and also rose sequentially. We're starting to see some of the matching algorithms that we've been rolling out. I'm moving now to number 3, the fee side. Yes, we saw very, very strong incremental subscriber growth in the quarter 1.3 million and we raised our forecast for the year. We are seeing very, very good gains from our collection of premium services. We talked about some of the specifics on the call, the content bundled with access as all of our access providers grow their subs and we start to benefit from Verizon plus the music launch and we're seeing very good gains overall.$3 to $4 ARPOs continue to be good for the year. The last question is moneterization and where is that going to go and I think I'll just reminding you what we said before, which is, when we acquired overture and need to me, we first focused on the algorithmic side. After that we got that fully launched we will turned our attention to the moneterization side of the equation and a lot of our operating plans this year were all about developing a product suite, a very sequenced product suite in terms of how we could we could improve our moneterization and we see that as all upside from where we are now. What we said is we expected to see some of those products start to hit and benefit in late this year and then the financial impact really to build throughout 2006. Since there's been a lot of speculation on exactly when that is and what we're doing I think I will share a little more transparency on the product suite that drives that. So just to review, Terry talked a little bit about the Yahoo publisher network, which was launched in beta in August and will be more widely available in beta in Q1 of 2006. So that's one important pocket of activity and that we expected and has already been launched. Second broad bucket is our improving matching capabilities. Over the last couple of quarters we've been rolling out new capabilities that enhance matching that leads to overall increased coverage and better RPS. We are continuing to enhance those tools to broaden our matching capabilities and we should see additional changes rolled out every quarter throughout the year, but as I mentioned before we're already starting to see some benefit from that and we expect that to grow in 2006 as well. The third and final broad bucket of various initiatives is concerned around improving our relevance and our quick through rates of our paid listings. Our matching initiatives is largely focused on coverage and these are largely focused on click threw and better tools to advertisers. Our plan now is to begin testing some of those initiatives in the first half of '06 with a broader rollout there after. All of these initiatives have been already much right on track and consistent with our original plan which is to have a sequenced series of products starting late this year building throughout next year and that's why we have been advising you that we expect the financial impact to grow throughout 2006.

Operator:

The next question comes from Lauren from Merrill Lynch. Please go ahead.

Q: Thank you. Just a couple of quick ones. Terry you talked about the integration of user generated content and professional content and I'm just curious how you look at that from a return on investment point of view. I'm just thinking that some of the investment that you're making could either be viewed as too small or too big in terms of some of the content that you're generating yourself and I'm also curious if you could discuss head count as you approach the end of the year, if we should expect to see an increase in the fourth quarter as big as we saw in the third quarter.

A: I'll begin. I guess it depends on which side of the glass you're looking at if the expenditures are too large or too small. I consider them to be totally appropriate. So they are not large. This is not a sprint. This is an ability to Yahoo to take the leadership position and start to evolve a whole new industry as it relates to media and media content. And so don't look for any one thing that's either going to be wildly expensive or any one thing that's going to change the whole direction, but look to a series of things, some of which will be generated by Yahoo, some of which will be licensed and our partners with others as we've been doing in the past and a large portion of it will be user generated content that Yahoo will totally enable and give you users an opportunity to use our tools, post them, move them around our network from either their buddy list or their families or attach advertising links to it, and give them the ability to create businesses if you will. So we have I think a very exciting roadmap that includes some things that we're going to do on our own and many things that we're going to do with many others.

A: Sue, you want to take it?

A: Sure. Lauren, on the question of head count, yeah, we did have a very large increase in Q3, which was consistent with our expectations. We're really, really fortunate to have hired some of the talent that we've hired and as you can see from a lot of the product rollout that Terry talked about it's been a renaissance in terms of our overall product suite. We do expect to hire in the fourth quarter probably not quite at the pace that we experienced in Q3.

Q: I'm trying to interpret the fourth quarter guidance. In particular, how much of the Yahoo China operations on both the revenue and operating loss basis are included in the numbers what percent of the quarter if you will and if you can think about Alibaba today does it currently make an operating profit?.

A: Okay. Jordan, it's Sue. Looking at the Q4 guidance, there are a few things affecting our Q4 guidance. I think if you work through the math there's roughly about a $7 million quarterly impact for deconsolidation Alibaba, which is deconsolidation for not the whole quarter but a lot of it. China operations had been basically running at break even for the nine months. So no real impact from that. And then in terms of Alibaba specifically we really cannot comment on their financials. They have put out some forecasts in the past for their core B to B business, which would indicate they're quite profitable, but that's really a question for them.

Operator:

The next question comes from Baba Rashid from Piper Jeffery. Please go ahead.

Q: Good afternoon. Terry, you talked about the growth in the top 200 advertisers well above I believe the 40% or so growth in the overall marketing services. Could you give us some more color on what you see in the broader base of your brand advertisers or let's say search advertisers. Is there a concentration among sort of a group of advertisers that are giving you a higher growth? Are your smaller advertisers going just as fast or not can I have it quick, Thank You.

A: Baba, It’s Terry. I would start off by saying our brand advertising business is terrific and it's very, very well-balanced so we're seeing great growth in terms of the amount of dollars being spent by many of the top, top companies in top, top categories whether that's auto to CPG or financial services and others. But let me say this, we're seeing across the board growth, frankly in both of our advertising businesses but across the board, so our smaller and more medium-sized advertisers are doing a much better job as well and it's not really limited to any one area or any one size company. It's companies more and more becoming more and more accustomed and more and more comfortable with brand advertising on Yahoo and it time to pick up their pace. So like the logic companies they started with very small amounts. They started to emerge into slightly larger and that process just continues each and every quarter. We're seeing it across the board in both small, medium and large advertisers.

Operator:

The next question comes from Mark Rollin from Prudential. Please go ahead.

Q: Thanks. Good afternoon. A couple of quick questions. First congratulations on the Bell South signing. Do you think that given Bell South's footprint that that will ultimately be about half the size of the kind of revenues that you're generating with the SBC deal and on Verizon, given the fact that they have about a similar footprint to SBC but you're not exclusive, do you think that ultimately that could someday be the size of the kind of revenues you generate from SBC? And then secondly, Terry, on advertising inventory for the holidays, is that basically going to be the gating factor for your growth in branded advertising where everybody wants certain pages or is demand really the gating factor? Thank you.

A: Okay. Mark, I'm going to start on the Bell South deal, which we are really pleased to announce. In principle this is a very similar co-branded service provided at no additional charged on those Bell South residential broad band subscribers for all tiers of service and the existing base will have the option to select the broad band service and new ones will be co-branded so in terms of the financial impact, this is not going to be launched until late '06 so I want make sure that you're counting that in and we don't expect any meaningful contributions in '06 itself. As I mentioned the structure of the deal is broadly similar to past broadband deals, we receive a monthly payment and Bell South participates in a revenue share. In term of economics gaining the nationwide presence was the most important factor to us, to add new users and expand our geographic footprint. Also when you compare it to recent deals that of Verizon or economics with Bell South reflect the factor we are initially the default offering for all new Bell South subs, which is a better position for us from a subscriber standpoint. In terms of the overall sub base, its sub base is roughly 2.5 million broadband users. So you can kind of play around with the map I think hopefully with those parameters.

A: This is Dan. On the question of the advertising and the holidays in general demand and what are the gating factors, we have tremendous inventory as you know and Terry and Sue took you through some of the highlights of the actual, incredible growth we're seeing all through the network. Terry also mentioned that increasingly advertisers are taking us up on using targeting capabilities. As those get lot better. That helps us much more efficiently use our own inventory so we're able to create inventory based on a result of that. So based on the growth we have organically the number of services users are using which Terry mentioned are going up, the frequency in which people are visiting are going up and the fact that we're more efficiently able to target advertisers and find the kinds of consumers that advertisers want particularly the large ones, we think that we have plenty of inventory to continue to grow quite nicely.

Operator:

The next question comes from _____ from Jefferies and company. Please go ahead.

Q: Yes, thanks a lot. Two very quick ones Sue, could you comment a little bit on your growth on the proprietary side versus growth in the network. Tax seems to have stabilized from what it did last quarter when it was up a few hundred basis points and then Terry, you said earlier that you're expecting your strategy to unfold over the coming months. I was wondering if you could give us any more clarity on that. Thank you.

A: Okay. Sure. In terms of the underlying growth of our search business, we really don't talk about the owned and operated piece but we do put out our tack numbers so there are a few things you can ascertain from that. You'll see it grew 5% quarter to quarter. Our overall tack rates stayed stable or even declined a tad, so the underlying growth of our affiliates you could probably infer from that was a little higher than our stated tax. I think one important thing to mention from that though is that I talked a little bit about MSN and that trailing down a little bit, so that mixed shift would tend to keep the reported tack relatively stable to down even though the underlying tack continues to see exactly what we've been expecting in that we have messaged you for the last two years, which is modest increases in both international and domestic.

A: Hi, its Terry. So on voice over IP. Yahoo is already a significant player in the PC to PC product and I did mention that you could see future innovations in the upcoming months. Bear in mind, as you know, we did buy dial pad and that does give us capabilities to much improve what we currently have in the marketplace and we're also looking forward and tend to work together with a number of our access partners in their territories and we have been exploring opportunities of working together.

Operator:

The next question comes from John Genadas from Bank of America. Please go ahead.

Q: Hi. Can you please talk about the improved hot jobs offering? What has been the early feedback and have you seen much of a change in traffic and also is it safe to assume the listings business growth rate is in line with what it's been historically? Thanks.

A : I'll take the first part and sue will take the second part. On the hot jobs it's actually been met with excellent response, it's the same philosophy as search, which is the ability to have the most comprehensive and relative offering. It's really opened up the marketplace to allow more users to come on in and be able to find what they that ear looking for. So we have been quite successfully, as we roll this out, really my been able to get more usage out of each user as they come back and come back repeatedly. This has been helping those that want to market through hot jobs have more listings on there. It actually helps the commercial listings as well because of the frequency and the intent of the user. So the early signs are quite good so far.

A: On the listing side of the house, we have seen very consistent listings growth with what we've seen in the past and that is now all in our marketing services line.

Operator:

The next question comes from Mark Maheny from Citi Group. Please go ahead.

Q: Thank you very much. Two quick questions. One on local search based on this Whereonearth acquisition. What's your sense about when local search could become material? There are a lot of gating factors here. People have talked about local search for perhaps the last two years. It looks like the date has been immaterial, but what is your sense on when it does become material and what is the single biggest gating factor as you see it. Then a real quick question on the numbers. I think if we back into what the using the tack back into what non search marketing services revenue growth was, I think it was approximately we calculated around 10% which would actually imply an acceleration in year over year branded advertising growth. Any comment or feedback on those numbers? Thanks a lot.

A - Dan: This is Dan, I'll take the first part of the local question. There's actually multiple parts to your question, which is when we talk about when does local become material, with if we talk from user perspective it is already material. Whether you come to yahoo and use Yahoo yellow pages or Yahoo local. It's quite substantial part of what users come to us today you search local search in yellow pages. So from that perspective it has been steadily gaining ground each and every year and it's actually a very large percentage of the queries that go in there. We've also expanded local to not just be in those sections but to make areas such as travel become more localized. So there is a number of things were doing that continue to keep us in the leadership position in the entire category. This particular acquisition will help with the moneterization side of local, which is to be able to more effectively target advertising to the local markets and in that world there's two groups. The big L which is the large advertisers who have the national budgets but also advertise locally and then there are small advertisers who have not really come on the web or are coming on to the web and the gating factor there of course is how do you get them on to the web. So that's going to take time. They're coming on more and more every day our small business offerings help that our yellow pages help that. Our feed system helps that and our Yahoo search marketing helps that so that's just going to continue to build over time. As you get a larger base of them, the ads get more relevant. On the big L, which is large advertisers targeting locally we've been quite successful with that and the kind of targeting capability that we have has been very effective in helping these advertisers expand how much marketing they do on us so there is not a day or a week or a particular product that change the moneterization. It just will keep building over time and become more material over time.

A: So, just moving on to the second question, I'm trying to follow the math here. I'll just give you a couple parameters here. Our marketing services extax grew 6% as a whole sequentially quarter to quarter and I think I mentioned earlier that you saw tack was up 5%, but that our tack rate declined slightly so that would imply our affiliate growth rate was broadly consistent with the overall ones. Therefore I think your conclusion would be that owned and operating brand together grew roughly 6% quarter to quarter so I'm not sure how you got into 10% but I don't think we want to get a lot more clarity beyond that and I think you have a lot more parameters to work with there.

Q: Thank you. If you could just give us a little bit more color on the branded side of your business specifically calibrates freezing upon your top properties and maybe how pricing is trending versus a year ago or last quarter and then if you could just clarify a comment you made earlier on the search side in Europe, did you say you were gaining market share in all of Europe or you were just gaining market share in some markets?

A: This is Dan, I'll start and then we'll turn over to Sue for pricing. On the inventory question as I explained earlier, that given the natural organic growth of Yahoo which has been quite substantial as you saw this quarter and given the frequency in which users are returning all of which continued to go up quite nicely, we don't have an inventory problem in terms of the traditional ways. Plus our targeting capability is allowing us to take the largest advertisers who would normally be focused on one particular content area and help them be successful across the network. So that's some of the benefits of being able to use the Internet versus other medium and advertise. We've really doubled the number of advertisers that are using targeting capabilities over the last year so that's been a really big benefit for marketers and for Yahoo. The search in Europe, it's not in necessarily every country. We continue to maintain share most all major markets. In some cases we gain, but the overall message here is that the category is growing quite nicely and Yahoo continues to grow along with the category. We ‘ve been in this market for just a short period of pretty time We're extremely pleased with our success and we actually have been adding new products and new capabilities and new relevancies which we think make us second to none at any of these markets so we look forward to the future.

A: So just to conclude with the pricing question on the branded side just to take a step back, since we already do business with most of the nation's top marketers our primary focus is on depth over breathed driving revenue per advertiser over increasing the number of advertisers. In terms of the revenue per advertisers which is going very rapidly is split across pricing and inventory. I think I mentioned earlier that a really good proxy for pricing on the brand side is to look for the marketing services revenue per page view excluding search from the numerator and search pages from the denominator. On that basis pricing was up again in this quarter double digits as we've seen in most of the recent quarters that I can remember. We also had very nice growth in inventory as you saw from our overall page view gains. We said that was up 26%. That could include search and the rest of the network, but the point is that the overall attractiveness of the medium is causing more consumers to come we're seeing double digit gains in both in inventory and in pricing.

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